WORKER-ON-WORKER EXPLOITATION IN A CONTEMPORARY MARKET ECONOMY

WORKER-ON-WORKER EXPLOITATION IN A CONTEMPORARY MARKET ECONOMY

Aleksei Izyumov

Ph. D., University of Louisville, Louisville, USA, Visiting Professor, Novosibirsk State University,

Russia, Novosibirsk

ABSTRACT

In economic theory discussion of exploitation for a long time has been dominated by Marxists who counted all income created but not paid out to workers as a surplus value unfairly appropriated by owners of the means of production i.e. capitalists. In this paper we consider a much less studied aspect of exploitation. Using the rent-based definition of exploitation originally proposed by the Fabians and recent data on pay differences between public and private sector workers in the U.S. we argue that modern-day capitalist economy generates rent-based relations that qualify as worker-on-worker exploitation.

1. Economic rents as a basis for exploitation

While the overwhelming part of Marxian analysis was devoted to capitalist exploitation of workers, Karl Marx and his early followers, such as Frederick Engels, did consider a possibility of exploitation of workers by workers. Thus, discussing wages of the labor elite (“labor aristocracy”) in England, Engels argued that part of these wages was derived from surplus value generated by over-exploitation of workers in the British colonies [3].

Marxian definition of “productive labor” contains however a major contradiction. In strict Marxian terms, most of today’s workers, including in particular all service sector employees are not producing value and are paid out of surplus generated by their peers employed in manufacturing, farming and other branches of material production [7]. Applying this approach to a modern service-based economy automatically turns the majority of labor force into de-facto exploiters – not a realistic position by any means.

In neo-Marxian literature, the definition of “productive workers” is often expanded to include some of the non-material service sector, e.g. school teachers and health care professionals, but the concept of exploitation rooted in productive labor-value-based approach generally remains in place.

Unlike the traditional Marxian approach, the rent-based concept of exploitation proposed by the Fabians [14;18] and developed by Sorensen [16; 17] does not require adherence to the restrictive assumptions of the labor value theory. In their model, exploitative rents are generated when actual income of an economic agent or agents surpasses their income based on marginal productivity.

The simple definition of economic rent according to that is:

R_i = V_i^a - V_i^c                                                                                                                      (1)

Where R_i is return on asset i, V_i^a - actual value received, V_i^c - value that would be received under perfectly competitive market conditions. [17, p. 1536-37].

Since rents always involve re-distribution of income, recipients of rents become an exploiting class while payers of such rents become an exploited class [17, p. 1535]. The concept of exploitation based on economic rents does not contradict the Marxian theory of exploitation. In fact, the latter can be considered as a special case of the former under the special assumption that marginal productivity of capital is always equal to zero and all profits are thus economic rents. The advantage of economic rent-based approach to exploitation compared to surplus-value based one is that it allows to consider a broader range of types of exploitation existing in the society.

Importantly, rents in (1) are not necessarily based on ownership of assets, such as capital, labor, land or natural resources. Control of any of these assets can be sufficient for receiving rents. Examples of that are Communist economies of the past (USSR, China) or present (Cuba and North Korea), where ruling communist bureaucracy did not (does not) own productive assets but still benefits from them at the expense of the working population.

2. Public vs. private workers

The main source of rent payments in a capitalist economy is income of labor or, more specifically, income of private sector economy workers. Based on this assumption one can distinguish three important types of rents paid out of income of these workers: “top rents” flowing from workers to capital-owners, “bottom rents” flowing from workers to the non-working population and “horizontal rents” flowing from some workers to others. [2014 kyklos]. Most of these rents are taken out of the current income of workers contemporaneously in the form of underpayment of their wages and salaries, and/or through additional taxes.

Based on (1) a worker can be recipients of economic rents if he or she is paid wages above the level of compensation that would be received by them under perfectly competitive market conditions. We argue that the above attributes of rent generation do exist in the case of public sector workers who receive compensation above similarly qualified workers in the private sector. If most of this compensation premium is paid out of income of the private sector workers, we are facing the case of worker-on-worker exploitation.

The possibility of whether or not one group of workers may exploit another generally has been considered in some recent papers on the micro-level. Sakamoto and Kim [13] have developed a method for examining exploitation within a particular industry. They defined exploitation as "the extent to which the earnings of various groups in the labor force are underpaid relative to the market value of their productivities" [13, p. 20]. Using productivity statistics in the U.S. manufacturing sector, Sakamoto and Kim found that middle-aged workers were overpaid by 40 percent, older workers were overpaid by 47 percent, and managers were overpaid by 66 percent relative to their productivity while women were underpaid by 39 percent, blue-collar workers were underpaid by 38 percent, Hispanics were underpaid by 29 percent, and African Americans were underpaid by 23 percent relative to their productivity [17, p. 32].

The majority of studies in rather extensive literature comparing pay in public and private sector in developed countries find that controlled for all observable characteristics compensation of public sector workers inclusive of benefits exceeds that of private sector workers by 10-20% and possibly more if job security and job effort is also considered. [1; 2; 4; 7; 10; 11; 15].

The estimation of rents captured by workers in the public sector of the economy should start with the average level of their overpayment compared to similarly skilled private sector workers:

w_pub = (1 + m) * w_prv                                                                                                            (2)

Where w_pub and w_prv is average per hour compensation of similarly qualified public and private sector worker respectively, and m is the rate of overpayment.

The total rent captured by the public sector workers can be found as:

R_pub = m * w_prv * L_pub * H_pub                                                                                  (3)

Where L_pub is the total size of the public sector labor force and H_pub – number of hours worked per year by an average public sector worker.

The rate of exploitation (RE_pub/prv) of private sector workers by their public sector peers can then be estimated as the total of rent captured by public workers divided by the total of compensation received by private workers:

RE_pub/prv = m * w_prv * L_pub * H_pub / w_prv * L_prv * H_prv                                                                          (4)

or equivalently:

RE_pub = m * L_pub * H_pub / L_prv * H_prv                                                                            (5)

Computed that way RE_pub shows what part of its potential market-based pay the private sector worker has to give up to fund actual compensation premium of his or her public sector colleague.

A simplified illustration of the horizontal rents is given in Figure 1 with the upper panel presenting the case of the public sector, and the lower, the private sector of the economy. Under competitive market conditions,

Figure 1. Illustration of horizontal rents

wages of public and private sector workers are determined by their marginal productivity (MPL) given by points A and B respectively. In these points the difference between w_pub and w_prv is based only on skills and productivity of workers. The actual wage levels of public and private sector workers are given by points A’ and B’, where:

w_pub > MPL_pub  and w_prv < MPL_prv                                                                     (6)

The shaded area in the upper panel of Figure 1 represents the total sum of horizontal rent appropriated by the public sector workers, while the shaded area in the lower panel of Figure 1 represents the total loss of income suffered by the private sector workers. The value of the former is equal to the value of the latter based on the assumptions that: (i) R_pub is paid from additional taxes levied on private-sector workers and that (ii) the average

compensation of private-sector workers before these additional taxes approximates their marginal revenue productivity.

3. Estimates of worker-on-worker exploitation: the U.S. case study

For the U.S., arguably the most extensive and authoritative recent source of data on public-private sector pay gap are reports by the researchers of the Congressional Budget Office (CBO) and Bureau of Labor Statistics (BLS) of the Department of Commerce [2; 4]. These studies analyze pay gaps between public (federal, state and local government) and private sector workers. As of 2020, these two groups numbered respectively 22.7 million and 142 million workers [9].

The CBO study established that controlled for education, work experience, professional occupation and several other observable characteristics federal civilian employees (about 2.9 million total) are paid 17% above comparable private sector workers [2, p. 11]. Similarly, for state-level government workers the estimated overpayment was found to be between 3-10%, while for local-level public workers it amounted to 13-18% [4, p. 233]. Based on mid-points of these rates of overpayment and weighting them by the size of each category of government workers, the average rate of overpayment in the US public sector is approximately 14%. This number reflects the estimated premium that the US governments of all levels pay to their workers in excess of what would be paid to comparably skilled, aged and experienced workers drawn from the private sector.

Figure 2. Public and private sector worker compensation compared

Source: [2. p. 8-11; 4, p. 224] Average compensation is for state and local public workers (left bar), private sector workers (right bar). Note: Federal employees not included, data is for the year 2010.

Importantly, the public-private compensation premium primarily reflects the much higher level of benefits of public sector jobs, on average comprising over 34% of total compensation compared to 28 % for private sector workers. (See Figure 2).

Additional premium accrues to public sector workers due to sufficiently higher level of their job security. Existing survey-based studies estimate monetary value of this attribute of public sector jobs at 9-10% of total compensation [10; 12]. Some authors suggest that additional premium to public sector pay should also be imputed to account for less strenuous work effort due to lower risk of layoff and flatter compensation schedules [2; 4; 6; 11]. Allowing extra premiums for job security and work intensity the overall compensation premium of a US public sector worker is likely to be well above 14%, possibly in the range of 15-25%.

Based on official government statistics, in 2020 average private sector compensation, including benefits, was $83,655 [9]. Using the overpayment premium level of 15%, the total economic rent captured by the U.S. public sector workers in that year amounted to:

R_pub = 0.15 * 22.7 mln * $83,655 = $284.8 billion

If we assume 25% overpayment rate, the total becomes $474.7 billion. Applying these numbers to (5) the rate of exploitation of private sector workers by their public sector peers based on (5) and 15% overpayment is:

RE_pub = $284.8 billion / $83,655 * 142 mln = 2.5%

With 25% overpayment the RE becomes 4.1%. In other words, to fund 15 to 25% compensation premium received by an average public sector worker his or her opposite number in private sector gives up between 2.5-4% of their own compensation. In cash value terms, from the perspective of an average/ median private sector worker with annual pay of $83,655 to fund the unearned premium of public sector workers he/she has to give up between $2,090-$3,350. For a public sector worker, the cash value of the premium is between $12,500 ($284.8 billion/22.7 million) and $20,900 ($474.7 billion /22.7 million).

The above estimates are rough approximations. More precise computation should include adjustments to account for parts of premiums paid out of capital income (profits) and out of income taxes paid by public workers themselves. A portion of public sector overpayment funded by excise and property taxes should also be allocated between rent and non-rent incomes.

4. Conclusions

Comprehensive analysis of exploitation in a modern-day capitalist economy has to include all of its forms and should not be limited to only its traditional capital-to-labor dimension. Using the rent-based definition of exploitation originally proposed by the Fabians [14; 18 Shaw, 1891] and developed by Sorensen [16; 17] and data on pay differences between public and private sector workers in the U.S. we argued that contemporary market capitalist economy generates rent-based relations between these groups workers. The analysis of data indicates that thanks to their privileged position public sector workers are able to command wages and salaries well in excess of their similarly qualified colleagues in the private sector. In view of the fact that most of this premium is funded by additional taxes on private sector workers, such relationship fully qualifies as worker-on-worker exploitation.

References:

1. Campos, M. M., Depalo, D. Papapetrou, E., Pérez, J.J. and R. Ramos (2017) Understanding the Public Sector Pay Gap, IZA Journal of Labor Policy, 6(7), 1-29.
2. Congressional Budget Office (CBO) (2017). Comparing the Compensation of Federal and Private Sector Employees, 2011-2015. Washington, D.C.
3. Engels, Frederick (1975[1845]). The Condition of the Working Class in England. In Karl Marx and Frederick Engels, Collected Works, Vol. 4. New York: International Publishers, 1975.
4. Gittleman, Maury, and Brooks Pierce. (2011). Compensation for State and Local Government Workers. Journal of Economic Perspectives 26.1, 217-42.
5. Izyumov, Alexei and John Vahaly (2014). Rent-Based Exploitation: Top, Bottom and Horizontal. Kyklos International Review of Social Sciences. Vol. 67. No. 1, 74-82.
6. Lammam, Charles, Palacios, Milagros, Ren, Feixue, and Clemens, Jason (2016). Comparing government and private sector compensation in Canada. Fraser Research Bulletin, 1-12.
7. Marx, Karl. [1867] 1967 Capital: A Critical Analysis of Capitalist Production. New York: International Publishers.
8. Nickell, Stephen and Glenda Quintini, 2002. The Consequences of The Decline in Public Sector Pay in Britain: A Little Bit of Evidence, Economic Journal, 112(477), F107-F118.
9. Occupational Employment and Wages (2022). United States Department of Labor. Bureau of Labor Statistics. Web: <https://www.bls.gov>
10. Pfeifer, C. (2010). Risk aversion and sorting into public sector employment. German Economic Review, 12 (1), 85-99.
11. Prümer, S. and Schnabel, C. (2019) Questioning the Stereotype of the ‘Malingering Bureaucrat’: Absence of Work in the Public and Private Sector in Germany, Kyklos, 72(4), 570-603.
12. Ramoni-Perazzi, J. (2007). The compensating differential principle in the public and private sector: A multivariate statistical analysis approach. Economía, 32 (24), 95-112.
13. Sakamoto, Arthur and Chang Hwan Kim. 2010. Is Rising Earnings Inequality Associated with Increased Exploitation? Evidence for Manufacturing Industries in the U.S., 1971-1996. Sociological Perspectives 53,19-43.
14. Shaw, Bernard, Ed. (1891). Fabian Essays in Socialism. New York: The Humboldt Publishing Co.
15. Sławińska, K. (2020) ‘Public–Private Sector Wage Gap in a Group of European Countries: An Empirical Perspective’, Empirical Economics, accessed at https://doi.org/10.1007/s00181-020-01841-3
16. Sorensen, Aage B. (1998) On Kings, Pietism and Rent-Seeking in Scandinavian Welfare States. Acta Sociologoica 41 (4), 363-376.
17. Sorensen, Aage B. (2000) Towards a Sounder Basis for Class Analysis. American Journal of Sociology. 105 (6), 1523-58.
18. Webb, Sidney (1888) The Rate of Interest and the Laws of Distribution. Quarterly Journal of Economics, 2. pp. 188-208.